Consumer prices will stay at “tolerable” levels, easing investor concerns about excessive tightening of monetary policy after two interest-rate increases since October, Mobius, who oversees about $40 billion as executive chairman of Templeton Emerging Markets Group, said in response to e-mailed questions.

The Shanghai Composite Index fell 0.3 percent to 2,743.28 as of 9:55 a.m. local time. It has plunged 16 percent this year, the most among benchmark equity gauges for the 21 nations in the MSCI Emerging Markets Index, on concern tightening measures will slow economic growth. Along with rate increases, the central bank has boosted lenders’ reserve requirements six times this year to tame an inflation rate that climbed to 5.1 percent last month, the highest level in two years.

“We are confident that the Chinese government has the capability to control inflation at a reasonable level in 2011,” Mobius, 74, said yesterday. “If China can keep the CPI at about 4 percent in 2011, the equity market should perform well.”

The inflation rate jumped to a two-year high of 4.4 percent in October on rising food prices, spurring the central bank to boost borrowing costs for the first time in three years. The People’s Bank of China acted again on Christmas Day after November consumer prices surged to the highest level in 28 months. The government’s annual inflation target is 3 percent.

Government leaders pledged this month at the Central Economic Work Conference, attended by President Hu Jintao and Premier Wen Jiabao, to shift monetary policy to “prudent” from “appropriately loose” next year. Vice Premier Li Keqiang said the country will place more emphasis on inflation controls, China National Radio reported Dec. 28.

‘Tolerable’ Inflation

China is tightening after a record expansion of credit to counter the effects of the world financial crisis. The broadest measure of money supply, M2, has surged by 55 percent over the past two years and outstanding yuan-denominated loans have climbed 60 percent to 47.4 trillion yuan ($7.16 trillion).

“Inflation remains a problem but within tolerable levels and will probably not result in excessive tightening,” Mobius said.

China may raise rates as many as three times in the first half of next year, according to Morgan Stanley, while JPMorgan Chase & Co. forecasts two increases in that period. Inflation may stay at a “comparatively high level” in the first half, Liu Jianwei, a Shenzhen-based fund manager at Bosera Asset Management Co., said in an interview this week.

China is lagging behind counterparts across Asia that took steps earlier to raise borrowing costs from global recession lows. Malaysia boosted its benchmark rate three times, starting in March, Taiwan began in June and South Korea in July.

Emerging Markets

The MSCI Emerging Markets Index advanced 15 percent this year as investors poured money into developing countries where growth is outpacing the U.S. and the European Union. Russia’s Micex Index has advanced 22 percent, while India’s Sensitive Index has risen 16 percent.

“Emerging markets are now in a secular bull market and we expect this trend to continue into 2011, but with significant corrections along the way,” he said. “Even more money will be directed into these markets as investors around the world are beginning to realize that emerging markets are growing three times faster than developed markets, have more foreign reserves and lower debt-to-GDP ratios than developed markets.”

He favors commodity and consumer stocks because of increasing demand and rising incomes in developing nations.

“The negative impact on sentiment has already been factored in as the Chinese market underperformed,” said Mobius. “Going into 2011, we don’t think the government will significantly tighten liquidity unless there is a hyperinflation, which we think is highly unlikely.”